Understanding and Managing Corporate Conflicts: Causes, Impact, and Solutions

2024-01-21 21:34:32

In the business scenario, corporate conflicts often emerge, these being critical challenges that can shape the destiny of corporations. These conflicts, ranging from differences in strategic vision to disputes over financial management, not only test the strength of the relationships between partners, but also reflect the complexities inherent in business management.

This article seeks to explore the multiple facets of corporate conflicts, analyzing their causes, the impact they generate on the business fabric and the possible solutions to successfully navigate these challenges.

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Most common conflicts

Víctor Abad, director of the Corporate/M&A area at Philippi Prietocarrizosa Ferrero DU & Uría explains some of the most common corporate conflicts that we find in the Peruvian market that are linked to three key issues such as: (i) the transfer of shares; (ii) access to information; and, (iii) the election of directors.

First case – Transfer of shares: it is common for corporations to include in their statutes a preferential acquisition right, which allows shareholders to match any offer from third parties for the acquisition of shares issued by the company. Closed corporations have this right by legal mandate provided for in the General Companies Law.

In these cases, the restricted transfer must be determined, which can be used as a way to avoid the exercise of this preferential right, and that a third party ends up as an indirect shareholder without the direct shareholders having been given the opportunity to match the offer.

A restricted transfer can be direct or indirect, in the latter case, with shares of a holding company, which have not been issued directly by the company.

The specialist comments on the case of a company in the mining sector that even reached the Supreme Court, in which it was decided to preserve the right of preferential acquisition.

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Second case – Access to information: the rule provides that minority shareholders who exceed a certain shareholding may request information regarding the operation of the company. However, the company may limit access to information when the latter is considered sensitive or when its disclosure might affect the company.

Therefore, conflicts are generated when minority shareholders request information and it is cataloged in this way.

Furthermore, this right can be exercised abusively by the minority shareholder, presenting excessive information requirements that hinder the functioning of the company, or by the majority shareholders, causing the company to consider information that is not really sensitive as sensitive.

Víctor Abad mentions that there are cases of this type that have been prosecuted, and the damage is usually assumed by the minority shareholder, due to the delay in resolving these issues in court.

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Third case – Election of directors: in the case of the election of directors, the problem arises because the rule establishes that the election is carried out by cumulative vote.

That is, according to the participation of the shareholders. This is easy to execute when, for example, you have five directors and shareholders who have 80% and 20%, because the first will elect four directors and the second one.

However, it is not foreseen what happens when the participation of shareholders does not allow the exact percentage for the appointment of a director to be completed. For example, if in the previous case the participation was 70% and 30%.

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Conflict resolution

Luís Rodríguez, managing partner of Rodríguez Abogados & Asociados, recommends following these steps to effectively address these problems:

Negotiation and Mediation: Amicable resolution of conflicts is often preferable and can be achieved through negotiation and mediation. The legal area works to facilitate constructive conversations between conflicting parties, seeking solutions that satisfy the interests of both parties and preserve the long-term health of the company.

Arbitration: In cases where direct negotiation is not feasible, arbitration offers a more formal alternative to the courts. The legal area can guide their clients through arbitration processes, presenting arguments and evidence in a structured manner before an impartial third party who will make binding decisions.

Litigation: In more adverse situations, litigation may be inevitable. The legal area prepares and defends cases in court, ensuring that its clients’ interests are protected. However, litigation is generally considered a last resort due to its costs and associated uncertainty.

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Prevention

Luís Rodríguez affirms that prevention is always preferable to resolution. The right legal area can play a proactive role by educating partners regarding potential sources of conflict, encouraging open communication, and providing training on dispute resolution.

By cultivating an environment of understanding and collaboration, the risk of societal conflicts can be mitigated before they arise.

A key strategy to avoid corporate conflicts is the implementation of solid shareholder agreements from the beginning, whether within the bylaws or through shareholder agreements or corporate agreements.

These documents detail the governance structure, rights and responsibilities of shareholders, dispute resolution mechanisms, and provisions for the purchase or sale of shares in the event of disagreement.

In short, corporate conflicts are inevitable, but their proper management can preserve the health and longevity of a company. By proactively addressing these challenges, companies can strengthen their fundamentals and continue to thrive in the business environment.

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